Hello everyone its been a while since I've posted around here. I've been reading a lot and throwing a lot of ideas around in my mind. So I wanted to see what other peoples views are about things.

Like some of my earlier threads I'm facinated by human behavior and how it effects things on a large scale. I have a few questions that I might post in different threads depending on how things go.

First of all capitalism or a free market system depends on incentives. People will produce for society if there is an incentive to do so. At least that is my understanding. So my question is: How efficient are our incentives?

If it is efficient than the more productive something is for society the higher the incentive. And the alternate is that as something gets less and less productive the incentive becomes less and less.

Thus the more efficent the incentives the more likely they are to produce productive behavior. But are they efficient?

This dovetails into another question I have which is why we refer to the market as a sentient being that makes its own decisions and judgements on things, but I'll probably save that for later.

The core of the whole incentive/productivity business is the old supply/demand duality and its effect on prices.

In theory, I enter the labor market with my skills and consider which of the many fields I could apply myself in (this can work at even lower level as I consider which skills to acquire). All things being equal, I will end up choosing to work in a field in which I am paid the best (or in which there are most vacancies and thus greatest competition for workers - which should end up being the same thing).

Reason why that particular field is best rewarded one is *by definition* that there is greatest demand for it. If everyone needs services of a plumber and very few people need services of the comparative anthropologist (and both are in equal supply) then the guy *will* be better paid to do plumbing then comparative anthropology.

In this way, miracle of price formation transforms the societal needs *directly* into incentives to engage in a trade that satisfies those needs. Method that does it has no guiding mind, no one goes out and "set" prices - they just form based on what people need and how much of it is out there, like in one of our bidding Euro games. This, by the way, is "the market" which people talk about. It is not a sentient being but rather a simple process of agglomeration of many small-scale decisions that ends up looking like at the sufficiently large scale as the orderly/sentient system.

As long as we remember we are talking metaphorically it makes sense to talk about "the market" setting prices in a same way as it makes sense in physics to talk about electric currents, buoyancy, pressure etc doing things without having to go every time into details of quantum level description of what "actually" takes place.

Now, this great theory does not always work in practice. Monopolies, natural and mandated prohibit normal price-formation as do all sorts of barriers-to-entry into jobs and professions (from close-shop unions to limited entry to medical school). Price-controls when imposed by governments also wreck the incentive system.

Particularly insidious incentive issue occurs with so called "agency problem" whereby one attempts to hire someone to manage something for them. When that is done owner either has to spend so much time managing the manager as to make the existence of the manager redundant or they have problem making sure to ally the manager's interest with their own. This problem is at the core of the whole "executive pay" issue nowadays, but is not restricted to executives. Here too, government intervention can help exacerbate the problem (allowing "poison pill" provisions, limiting short-trading and such are all blatantly pro-management anti-owner laws that are on the books almost exclusively because the managers tend to lobby better then the owners).

Overall, answer to your question is - capitalism by default provides "correct" incentives (insofar as "correct" reflects what people want as opposed to what someone may thing they "need") but it can by stymied by poorly thought out policies or by market failures in particular areas (that economists are broadly aware of)

I'll take Manhattan in a garbage bag. With Latin written on it that says "It's hard to give a shit these days"

Prices aren't everything: They are a communication tool, that happens to be quite useful in many cases, but fails miserably in others.

The economy doesn't exist in a vacuum. Above the economy we'll always have the threat of social and physical aggression. Politics and guns will always affect the market, and it's impossible to create a market where those two do not apply.

Therefore, sometimes our incentives might end up relatively efficient, while other times they are anything but.

There's a lot of insight to be gained by looking at the math behind simulations that describe the interactions of hundreds, if not thousands of different agents, each with their own agendas and strategies. When we approach the modeling of markets from that perspective, it's easy to see the limitations of the evolutionary algorithms that power our markets. They are pretty good at finding decent solutions to problems, especially those that are so complex as to be intractable by more traditional means, but they don't really guarantee achieving maximums, and with the wrong starting conditions, they can just fail miserably.

But I guess that treating complex human behavior as something that can be solved with relatively simple calculus is too tempting for many to avoid. Maybe after a couple dozen more crashes we'll see that while markets might be the best tool we have available, we shouldn't just put blind trust on their principles.

Overall, answer to your question is - capitalism by default provides "correct" incentives (insofar as "correct" reflects what people want as opposed to what someone may thing they "need") but it can by stymied by poorly thought out policies or by market failures in particular areas (that economists are broadly aware of)

I guess this is just a restatement from a bove but what if what the society wants is actually counterproductive to the well being of the said society. Wouldn't it thereby cause incentives to things harmful to itself?

The market is really just a reflection of the values of a culture is it not? Could the values a of a culture be counterproductive and the market thereby reflect it?

Let me put it another way and use a gaming analogy. Modern Art is an interesting game that works really well when people are rather "rational" about their self interest. However when someone becomes irrational than the winner becomes the person who best profits from the irrational behavior, or in other words pays too much for a work of art. If there is at least one person who is irrational the only rational behavior (or attempt to win the game) Is to be the one that best takes advantage of irrational behavior. It then becomes a contest between the "rational" ones as to encourage the irrational behavior.

Encouraging irrational behavior can have some pretty strong incentives in an economy but could also threaten the health of the economy as a whole.

In this way, miracle of price formation transforms the societal needs *directly* into incentives to engage in a trade that satisfies those needs.

Here is the one place I'm going to nitpick but I think its an important nitpick. Does it transform societal needs or societal wantsinto incentives?

What if what the society wants as a whole is completely different from what it needs?

Key point here is - who decides what society needs as opposed to what it wants ?

As a rule whenever you give power to someone to decide that - society ends up "needing" a lot of whatever that person (or social group) likes.

If you decide by majority you will end up with lots of what majority wants and very little of what minority wants and still not with what people actually "need" in so far as "need" has any meaning.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

This is where I disagree with you. I am not talking about a heirarchical society or organization. I think we can still talk about needs and wants without including this in the discussion. I think that some societies have been better than others at having values that correspond its overall welfare.

The desires of our culture for instance have been shifting over the last several decades. In some instances we are have desires that correspond to the health of society but in many ways we have drifted from that.

I have been doing a lot of studying on the mortgage crises and there was a lot of (money) incentive to do things that were directly contrary to the health of society as a whole. That is because the desires of society became more focused on short term wealth vs. long term sustainability.

I don't think that there needs to be a hierarchical organization in this discussion. I think we can say that what the Market was rewarding because it was in the desires of our culture was opposite to what it needed.

As people as a whole in a culture become short sighted I think the market rewards things which will hurt the society as well.

As people are wiser in a culture the more wise and therefore efficient the reward structure in a market will be.

Key point here is - who decides what society needs as opposed to what it wants ?

Shorter answer to this question.

We all decide what society needs and what it wants. We as a whole all decide what is important in our society. The market itself is a mirror image of what we have decided is important to us.

What I'm saying is that the better we are as a society at this important skill (understanding what really should be important and what should not) the more efficient the incentive structure will be.

I love auction games. The most important skill in an auction game is knowing how to value things properly. One of the fundamental failures of markets is when people lose this ability as a whole thus creating "bubbles" in certain areas of the economy.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

This is where I disagree with you. I am not talking about a heirarchical society or organization. I think we can still talk about needs and wants without including this in the discussion. I think that some societies have been better than others at having values that correspond its overall welfare.

The desires of our culture for instance have been shifting over the last several decades. In some instances we are have desires that correspond to the health of society but in many ways we have drifted from that.

I have been doing a lot of studying on the mortgage crises and there was a lot of (money) incentive to do things that were directly contrary to the health of society as a whole. That is because the desires of society became more focused on short term wealth vs. long term sustainability.

I don't think that there needs to be a hierarchical organization in this discussion. I think we can say that what the Market was rewarding because it was in the desires of our culture was opposite to what it needed.

As people as a whole in a culture become short sighted I think the market rewards things which will hurt the society as well.

As people are wiser in a culture the more wise and therefore efficient the reward structure in a market will be.

I could even agree with you to some extent. I for one think that the personal cars are pinnacle of inefficiency unless one is a tradesman or an artisan of some sort and that living in detached family homes is kinda ridiculous in this day and age.

That said, I only agree with you as a philosophical point along the lines of "would it not be great if people were wiser". Any attempt to turn this philosophical point into political action is extremely dangerous and ultimately futile because no one has yet satisfactorily answered old Job's question of "Where shall Wisdom be found ?"

Market is therefore, to paraphrase Churchill, least efficient of all the systems, except for all the other ones that we could try.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

This is where I disagree with you. I am not talking about a heirarchical society or organization. I think we can still talk about needs and wants without including this in the discussion. I think that some societies have been better than others at having values that correspond its overall welfare.

The desires of our culture for instance have been shifting over the last several decades. In some instances we are have desires that correspond to the health of society but in many ways we have drifted from that.

Either this is a trivial statement in the sense that "society" can be "blamed" for anything that occurs or are you saying there is evidence that human behavior has taken a psychological turn for the worse? If the latter, why scientific evidence do you have that brains have changed in the last few decades?

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

This is where I disagree with you. I am not talking about a heirarchical society or organization. I think we can still talk about needs and wants without including this in the discussion. I think that some societies have been better than others at having values that correspond its overall welfare.

The desires of our culture for instance have been shifting over the last several decades. In some instances we are have desires that correspond to the health of society but in many ways we have drifted from that.

I have been doing a lot of studying on the mortgage crises and there was a lot of (money) incentive to do things that were directly contrary to the health of society as a whole. That is because the desires of society became more focused on short term wealth vs. long term sustainability.

I don't think that there needs to be a hierarchical organization in this discussion. I think we can say that what the Market was rewarding because it was in the desires of our culture was opposite to what it needed.

As people as a whole in a culture become short sighted I think the market rewards things which will hurt the society as well.

As people are wiser in a culture the more wise and therefore efficient the reward structure in a market will be.

I could even agree with you to some extent. I for one think that the personal cars are pinnacle of inefficiency unless one is a tradesman or an artisan of some sort and that living in detached family homes is kinda ridiculous in this day and age.

That said, I only agree with you as a philosophical point along the lines of "would it not be great if people were wiser". Any attempt to turn this philosophical point into political action is extremely dangerous and ultimately futile because no one has yet satisfactorily answered old Job's question of "Where shall Wisdom be found ?"

Market is therefore, to paraphrase Churchill, least efficient of all the systems, except for all the other ones that we could try.

I am not interested in a political system as I don't think it will help things to be better. This is one of the reasons I am rather non political. I think our problems and the answer to those problems rest with how wise and virtuous we are as a nation. Attempts to fix problems should come in trying to help shape that.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

This is where I disagree with you. I am not talking about a heirarchical society or organization. I think we can still talk about needs and wants without including this in the discussion. I think that some societies have been better than others at having values that correspond its overall welfare.

The desires of our culture for instance have been shifting over the last several decades. In some instances we are have desires that correspond to the health of society but in many ways we have drifted from that.

Either this is a trivial statement in the sense that "society" can be "blamed" for anything that occurs or are you saying there is evidence that human behavior has taken a psychological turn for the worse? If the latter, why scientific evidence do you have that brains have changed in the last few decades?

As a student (and teacher) of human development I can definitely say that Human behavior is not a constant. While our genetic potential may remain fairly static our brains are fairly malleable and develop differently based on a lot of environmental factors including cultural values.

Cultural values do not remain constant over time either

This graph shows the results of a survey in which they asked college students what was most important to them in their life. The results have changed over time as you can see.

The UCLA annual survey also found that 3/4 of those surveyed in 2006 thought it was essential or very important to be "very well-off financially"

Another recent poll from the Pew Research Center found that about 80 percent of 18-25 year olds in this country see getting rich as a top life goal for their generation.

Another study shows that there is a 500% increase in the amount of spending by parents on their children today vs. just one generation earlier when adjusted for inflation. (National Institute on Media and the Family)

It's interesting that you should ask me this question as I was wondering if the reason why I felt I was having a hard time getting my point accross is because a lot of economists take human behavior and values as a constant and I do not.

But I guess that treating complex human behavior as something that can be solved with relatively simple calculus is too tempting for many to avoid. Maybe after a couple dozen more crashes we'll see that while markets might be the best tool we have available, we shouldn't just put blind trust on their principles.

I guess this is what I am worried about. Human behavior changes and the efficiency of markets change based on our behavior.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

It's interesting that you should ask me this question as I was wondering if the reason why I felt I was having a hard time getting my point accross is because a lot of economists take human behavior and values as a constant and I do not.

have been doing a lot of studying on the mortgage crises and there was a lot of (money) incentive to do things that were directly contrary to the health of society as a whole. That is because the desires of society became more focused on short term wealth vs. long term sustainability.

It seems you are claiming that the mortgage crisis was caused because polls have shown that people want to be more well off financially than in the past. This isn't to say that cultural value shifts don't play a role; I just don't find this has much explanatory power compared to significant public policy changes that created serious moral hazards concerning derivatives, mortgages, etc.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

It's interesting that you should ask me this question as I was wondering if the reason why I felt I was having a hard time getting my point accross is because a lot of economists take human behavior and values as a constant and I do not.

I don't think economists claim that opinions and trends don't change.

That's good to know but I rarely see economists take into account psychology or even sociology into some of the models. If you know of some I would love to take a look

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Above you wrote:

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have been doing a lot of studying on the mortgage crises and there was a lot of (money) incentive to do things that were directly contrary to the health of society as a whole. That is because the desires of society became more focused on short term wealth vs. long term sustainability.

It seems you are claiming that the mortgage crisis was caused because polls have shown that people want to be more well off financially than in the past. This isn't to say that cultural value shifts don't play a role; I just don't find this has much explanatory power compared to significant public policy changes that created serious moral hazards concerning derivatives, mortgages, etc.

The polls are a response to your question as to whether I had evidence of a shift in human behavior. I wasn't using them as evidence for the mortgage crises.

The more and and more I read I see that the two are probably related but I wouldn't use them as evidence. It seems to be that the combination of individual greed (and lack of wisdom) in buying houses people couldn't afford using risky mortgages along with the voracious appetite wall street had for securities involving these mortgages. because of the potential return on them had a great thing to do with the crises.

Public policy of course had a role in it, enabled it and encouraged it. But I don't know if you can say that public policy made people get stupid loans and that public policy encouraged Bear Stearns, and Lehman brothers to create and sell as many of these loans as possible. There were considerable market forces that offered incentives to these groups of people.

Just so you know I'm not advocating for government control as I know you are big on free markets. What I'm saying is that free markets and their efficency is greatly dependent on human behavior.

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

It's interesting that you should ask me this question as I was wondering if the reason why I felt I was having a hard time getting my point accross is because a lot of economists take human behavior and values as a constant and I do not.

I don't think economists claim that opinions and trends don't change.

That's good to know but I rarely see economists take into account psychology or even sociology into some of the models. If you know of some I would love to take a look

I think that ultimately "need" as contrasted to "want" only has meaning in the context of hierarchical society or organization (i.e. it is something that applies to adults talking to kids) and not to a society composed or equal individuals - or to put it even more bluntly, if we do not trust people to be the best arbiters of their own needs then we must advocate tyranny.

It's interesting that you should ask me this question as I was wondering if the reason why I felt I was having a hard time getting my point accross is because a lot of economists take human behavior and values as a constant and I do not.

I don't think economists claim that opinions and trends don't change.

That's good to know but I rarely see economists take into account psychology or even sociology into some of the models. If you know of some I would love to take a look